Why does Ford (NYSE:F) think that its Japanese rivals have an unfair advantage in the U.S.?
Ford is concerned the Japanese government might be intentionally manipulating its currency to give the nation's companies an advantage abroad -- particularly in the U.S.
The automaker is pushing for new rules to prevent exchange-rate manipulation by governments, as part of a new trade treaty being negotiated between the U.S. and several Asia-Pacific countries, including Japan.
But what Ford executives are really upset about is what they say is a huge financial advantage for archrival Toyota (NYSE:TM).
More yen for the same dollar = fatter profits for Toyota
Here's the gist of the problem. Three years ago, one U.S. dollar bought 76 Japanese yen. Now, one dollar is worth about 117 yen. That means each dollar earned in the U.S. by a Japanese company is worth a lot more yen than it was three years ago.
That in turn means Japanese automakers (and other Japanese businesses selling goods and services in the U.S.) can cut their prices, because it now takes fewer dollars to generate a good profit when those dollars are turned into yen.
Alternatively, they can offer more content for the same price -- more standard equipment on a car, for instance -- or they can simply bank the added profits. In any event, it's a big competitive advantage for companies such as Toyota, one that is magnified by the thin profit margins and fierce competition in the world of new cars and trucks.
Ford's CFO: Toyota has a $11,000-per-car advantage
Ford CFO Bob Shanks told Bloomberg this week that the company is particularly concerned about the huge cash advantage being built up by Toyota, which reported spectacular profits recently. "The competitive landscape really shifts when you've got a competitor that suddenly has got that kind of windfall simply because the currency has moved," Shanks said.
The CFO told Bloomberg that the yen's movement over the last three years has given Toyota an added profit of about $11,000 per car sold. He said Toyota's earnings before interest and taxes doubled from 2012 to 2013, to $24 billion, after the first big move in the dollar-yen rate. Of that, $10 billion was due to the yen-dollar exchange-rate shift, he said.
Ford clearly thinks this is an unfair advantage.
Toyota says it isn't doing anything wrong -- and it really isn't
Toyota doesn't see it that way, of course. The Japanese company's view is that it does not control the exchange rates, which is true. Historically, sometimes the rates have worked in its favor, and sometimes they haven't. Toyota also points out that nearly three-quarters of the vehicles it sells in the U.S. are built in North America, meaning it is paying workers and many of its suppliers in currencies other than yen.
The reality is that to the extent the Japanese government might be manipulating the yen, it's in an attempt to stimulate the nation's domestic economy, which has been slow for years, by boosting exports.
But Shanks thinks the problem isn't just about North America. He believes the weak yen gives Toyota more power to lower prices in price-sensitive emerging markets such as Russia and Thailand, in part because the company can make up the difference in the U.S.
The upshot: Don't expect big changes soon
This problem will likely resolve itself in time -- either because dollar-yen exchange rates will shift to strengthen the yen, or because the U.S. and Japanese governments agree to some sort of deal to mitigate the effects of the yen's weakness.
In the meantime, Toyota shareholders get to enjoy windfall profits and Ford executives get to figure out how to compete with their rival's fast-growing financial war chest. Stay tuned.